IRS Expands Approval for Changes in DB Plan Funding Method

An Internal Revenue Service announcement provides for
automatic approval of a change in funding method with respect to a
single-employer defined benefit plan under certain circumstances in which the
change in method results from a change in the plan’s enrolled actuary.

According to Announcement 2015-3, under Section 412(c)(5) of
the Internal Revenue Code, as in effect prior to the Pension Protection Act of
2006 (PPA), any change of funding method requires the approval of the IRS.
However, Revenue Procedure 2000-40 provided automatic approval for certain
changes in funding method that occurred with respect to “takeover plans”—plans
for which both the enrolled actuary and the business organization providing
actuarial services are changed.

Section 412(d)(1) of the Code, as amended by PPA, retained
the requirement that a change in funding method be approved by the IRS. Under
PPA, a single funding method must be used to determine the liabilities for any
single-employer defined benefit plan subject to Section 430, but there may be
some variation in the manner the method is applied. The prior Revenue Procedure
has not been updated to reflect the changes made by PPA, and calculations used
for a “5% test” that was a condition of automatic approval for takeover plans
are not used under Section 430. The test basically requires that the actuarial
value of plan assets for the prior plan year, as calculated by the new enrolled
actuary, be within 5% of the value for the actuarial value of plan assets
reported in the prior plan year’s Schedule SB (Form 5500, Single-Employer
Defined Benefit Plan Actuarial Information).

For plan years beginning on or after January 1, 2009,
Announcement 2010-3 provides automatic approval for certain changes in funding
method used to determine the minimum funding requirement for defined benefit
plans subject to the requirements of Section 430. These approvals apply to
certain funding method changes that result either from a change in the
valuation software used to determine the liabilities for such plans or from a
change in the enrolled actuary and the business organization providing
actuarial services to the plan. Under Announcement 2010-3, 5% tests similar to
those under Revenue Procedure 2000-40 are required to be applied with respect
to the liabilities and assets reflected on the Schedule SB for the prior plan
year.

The current announcement expands upon the automatic approval
for takeover plans under Announcement 2010-3 by allowing the 5% tests to be
performed for the year in which the takeover occurs, and permits the newly
hired enrolled actuary to use a signed actuarial valuation report issued by the
prior enrolled actuary for the plan in lieu of the Schedule SB. This change
facilitates the filing of an amended Schedule SB for the 2013 plan year for a
takeover plan without the need for the newly hired enrolled actuary to perform
the 5% test using the valuation results for the 2012 plan year.

The
announcement lays out four conditions for a plan to have automatic approval of
a change in funding method.